How are capital gains from the sale of real estate taxed?
Gains realized by individuals from the sale of real estate are subject to real estate gains tax on cantonal and/or communal level. On federal level, such gains realized by individuals are usually tax-free provided, for example, such transactions are not performed on a professional basis.
If the real estate qualifies as a business asset or is sold by legal entities, in most cantons (such as in Zug and Lucerne) the respective gains are subject to the ordinary income taxes. Only in a few cantons, such as in Zurich and Schwyz, these gains are subject to the real estate gains tax the same as for individuals.
However, the real estate gains tax may also be triggered by the transfer of shares in so-called real estate companies. This generally applies to legal entities whose main business purpose and activities are the acquisition, administration, and sale of real estate. A transfer of such shares is considered as economically comparable to the transfer of the actual real estate owned by the respective legal entity.
How is the real estate gains tax calculated?
The real estate gain subject to taxation is calculated by deducting the (lower) acquisition costs from the (higher) sales price. The acquisition costs may include – besides of the original purchase price for the property – any investments and expenses related to the transfer of the real estate. After a certain ownership period, an alternative acquisition price may be used as the basis for the calculation instead of the actual or historical acquisition price (e.g. in the Canton of Zug after more than 25 years and in the Canton of Lucerne after more than 30 years). As a result, the taxable gain may often be reduced to lower the tax burden. Each canton imposes different requirements to apply and calculate such an alternative acquisition price.
The tax rates on gains in connection with real estate vary between the cantons. In most cases, the tax rates also depend on the ownership period of the real estate. For example, in the canton of Zug, the tax rate equals the annual yield realized with the sale of the real estate, with a minimum tax rate of 10% and a maximum tax rate of 60% that decreases depending on the length of the ownership period. In the canton of Lucerne, the tax rates for the real estate gains tax depend on the amount of the realized gain and the ownership period. However, even in cases with a long owner-ship period and a comparable small gain of, for example, CHF 100’000 the tax rate still amounts to approx. 13.2%.
Besides of the real estate gains tax, most cantons also impose a so-called transfer tax in case of a transfer of a real estate. In the cantons of Zurich and Zug, this transfer tax is called a real estate register levy or fee. Only the canton of Schwyz does not impose such a transfer tax or any kind of register levy.
Who is required and liable to pay the real estate gains tax?
The seller, i.e. the former legal owner, of the real estate is required to pay the real estate gains tax. The purchaser is usually jointly liable for the payment. If the purchaser agrees to pay the real estate gains tax in addition to the purchase price, the tax is considered an additional compensation to the seller that increases the real estate gains tax in addition. In addition, depending on the canton the respective tax authorities may also establish a statutory mortgage on the transferred property in order to ensure the collection of the tax.
Are there possibilities to defer the real estate gains tax?
Some transactions allow a deferral of the real estate gains tax. Two regularly occurring examples involving individuals are further explained below: the transfer of real estate as a mixed donation and the sale of self-used property at the domicile.
Mixed donation with respect to the transfer of real estate
If real estate is transferred in form of a gift or as a gift that is credited against future inheritance entitlements the real estate gains tax can be deferred. Therefore, the transferring person is not obliged to pay real estate gains tax. However, the new owner of the property assumes the obligation to pay the deferred real estate gains tax from the previous owner: the new owner has to pay the real estate gains tax upon the sale of the property, whereas factors attributed to the previous owner (holding period, acquisition costs) will be taken into account for the calculation of the tax.
The deferral of the real estate gains tax can also be achieved in case of a mixed donation. A “mixed donation” means that the recipient of the property provides some kind of consideration to the transferor in return. This can be the assumption of a mortgage on the real estate or the creation of a usufruct or right of residence in favor of the transferor. The value of such usufruct or right of residence will then be calculated based on the statistic life expectancy of the beneficiary and the net-income from the property.
The requirements to apply a tax deferral in case of a mixed donation differ from canton to canton. In the canton of Zurich, it is required that there is an obvious imbalance between the value of the real estate and the consideration. Such an obvious imbalance is generally assumed if the difference between the market value of the real estate and the actual consideration amounts to at least 25%.
According to the practice in the canton of Lucerne, however, it is required that the consideration from the recipient is below the initial or historical acquisition costs. If the consideration exceeds the initial or historical acquisition costs, the difference is subject to the real estate gains tax. Only if a property is transferred in the form of a gift that is credited against future inheritance entitlements the consideration may be higher than the acquisition costs without triggering the real estate gains tax. Still, it is required that the “gift portion” amounts to at least 25% of the market value of the property.
In the canton of Zug, the administrative court has not yet decided on deferrals in case of a mixed donation. However, in a recent case, the court stated that it will likely apply the same practice as in the canton of Zurich. Thus, the tax could be deferred if the difference between the market value and the consideration exceeds 25%.
Reinvestment of the gain from the sale of self-used property at the domicile
The real estate gains tax may also be deferred in case of a sale of a self-used property at the domicile of the taxpayer. However, it is required that the proceeds from the sale are re-invested within a reasonable period of time that is usually assumed to be two years. In addition, the new property has to serve as the new domicile of the taxpayer. This applies, for example, to a married couple selling their house and buying a new apartment with the proceeds from the sale of the house.
As always: A deferral does not mean cancellation. As soon as the replacement property is sold – and provided there are no other circumstances qualifying for a new deferral – not only the gain from the sale of the replacement property is subject to taxation but also the re-invested gain from the previous property. For example, if the married couple is selling the self-owned apartment in order to move into a rental apartment, they have to pay real estate gains taxes on both: the gain from the apartment and the gain from the house previously sold.
This issue affects not only the seller but also the buyer of the replacement property. If the seller fails to pay the real estate gains tax, the tax authorities can claim the tax from the buyer: depending on the canton, the buyer either becomes jointly and severally liable for the payment of the tax or a statutory mortgage is automatically established on the acquired property. Any buyer of real estate should, therefore, take this issue into account and should address it in connection with the drafting of the real estate purchase agreement.
The content of this newsletter does not constitute legal or tax advice and may not be used as such. Our lawyers and tax experts will be happy to answer any further questions you may have on this subject.